Tags: Detroit | bankruptcy | muni | bond

Market Offers Big Payouts if Detroit Avoids Bankruptcy

Friday, 14 Jun 2013 07:38 AM

By Michael Carr

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Detroit is in the midst of a financial crisis. An emergency manager has been appointed and after an initial review of the city’s finances, Emergency Manager Kevyn Orr said there is a 50/50 chance Detroit will need to file for bankruptcy. Orr has promised a final decision by the end of July.

If Detroit does go into bankruptcy, no one knows what bills would be paid. Municipal bonds would be included among the city’s financial obligations, and their fate would be decided in the process.

As investors await news on the fate of Detroit, some municipal bonds maturing in less than a year are yielding more than 20 percent, and investors willing to accept the risks have a number of options among individual bonds for double-digit yields.

One way for investors to gain exposure to Detroit’s muni bonds with limited risk is through the Eaton Vance Michigan Municipal Bond Fund (MIW). This thinly traded, closed-end fund (CEF) offers a dividend yield of about 6.3 percent, with distributions paid monthly. It is trading at a discount of about 10 percent.

CEFs issue a fixed number of shares and the fund manager buys assets using the proceeds from the sale of those shares. Over time, the underlying assets will change in value, but the market price of the CEF may not fully reflect those changes. In the case of MIW, the fund is trading at a price equivalent to about 90 cents for $1 in assets.

The fund has only a small amount of exposure directly to Detroit, which limits the risk. If Detroit avoids bankruptcy, investors could benefit as the discount on MIW narrows or moves to a premium.

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